Norfolk Southern Faces Activist Investor Challenge

After one of Norfolk Southern’s freight trains derailed last year, spilling hazardous chemicals in an Ohio town, the company’s leaders were assailed by lawmakers, regulators and angry residents, an onslaught the executives managed to survive.

But Norfolk Southern’s management faces a fresh challenge this week from an investment firm that is asking shareholders to vote to replace the company’s chief executive, Alan Shaw, and appoint new directors to its board.

The campaign by Ancora, a Cleveland investment firm, invokes the accident in East Palestine, the Ohio town, but its main aim is to overhaul Norfolk Southern’s business strategy to bolster its profits.

The company’s leaders are vulnerable because Norfolk Southern’s stock price and profit margins lag those of its peers. Ancora’s plan in large part rests on cutting costs and making the company’s 19,100-mile rail network run more efficiently. In the past, investors have reaped big gains by installing managers who have pursued similar measures at other U.S. and Canadian freight railroads.

“When a network is broken, you see poor delivery times, more severe accidents and weak financials. Everyone suffers,” Jim Barber Jr., Ancora’s proposed chief executive, said in a statement on Tuesday. “We have the people and plan to earn trust and have the railroad live up to its potential.”

Norfolk Southern’s leaders contend that they are well suited to strengthen the railroad so it can thrive regardless of the state of the economy and that the company’s financial results would improve as it addressed safety issues and legal claims stemming from the East Palestine derailment.

The accident and the decision by Norfolk Southern to burn off a toxic chemical being transported on some of the derailed cars increased scrutiny of the railroad industry’s safety record. A bipartisan group of federal lawmakers proposed legislation that would strengthen rail safety rules, but the measure has not advanced.

Several government agencies are still investigating Norfolk Southern, including the National Transportation Safety Board, which is expected to release its findings on the cause of the accident soon. The company agreed last month to settle a class-action lawsuit filed by businesses and residents in East Palestine.

“We have a balanced strategy that’s built for the future, to break the cycle of rail losing market share to truck every year,” Mr. Shaw, who has been at Norfolk Southern for three decades, said in a statement Tuesday. “It’s working, we are safer, delivering better service, becoming more productive, and creating long-term value for our shareholders.”

Ancora and Norfolk Southern have been criticizing each other’s plans for the company for several weeks in an effort to win over shareholders. The results of the vote could be made public on Thursday, when the company holds its annual meeting. One big Norfolk Southern customer, Cleveland-Cliffs, a steel producer, is supporting Ancora, but others, including Consol Energy, the coal producer, are backing Mr. Shaw’s team.

Glass Lewis, which advises shareholders on how to vote, supports Ancora, while its peer, Institutional Shareholder Services, gave partial backing, suggesting that shareholders vote for some of the directors from each of the slates of nominees put forward by Ancora and Norfolk Southern, including Mr. Shaw.

Notably, Ancora is opposed by a prominent rail regulator: Martin J. Oberman, the departing chairman of the Surface Transportation Board, the federal agency that oversees freight railways. He contends that Ancora is proposing to cut costs so much that it could leave Norfolk Southern without the capacity to deal with an upswing in demand and unexpected disruptions, like the recent closing of the Baltimore port, which required a rerouting of coal shipments on Norfolk Southern trains.

“You don’t send a football team out onto the field without a backup quarterback,” said Mr. Oberman, who is retiring at the end of this week. “So when you have a disaster like Baltimore, Norfolk Southern was able to jump in and move all of that coal.”

Mr. Barber, Ancora’s proposed chief executive, was chief operating officer at UPS. John Kasich, the former Ohio governor, is among the six other proposed directors on Ancora’s slate.

In some ways, Norfolk Southern was obvious prey for a shareholder activist.

In the three years leading up to Jan. 30, the day before Ancora’s proposed overhaul was first reported, Norfolk Southern’s shares were flat, compared with a 25 percent rise for shares in CSX, another large freight railroad that operates in many of the same areas as Norfolk Southern.

Profitability also trailed. Last year, CSX’s operating margin, which measures the profits left after the costs of running the business, was 37.9 percent, compared with 32.6 percent for Norfolk Southern. Those numbers exclude expenses related to the East Palestine disaster.

Ancora wants to increase those profits by applying precision scheduled railroading, a collection of practices that were introduced in the rail industry over two decades ago. The practices include moving rail cars more quickly, standardizing scheduling, using fewer workers and operating longer trains.

Ancora has said the management it is seeking to install at Norfolk Southern would be able to slash costs by $800 million in its first year by reducing locomotives and freight cars and redesigning Norfolk Southern’s network. Ancora also expects the new executives to cut 1,450 employees over three years. Norfolk Southern employed 20,700 people at the end of last year.

Norfolk Southern, like other big freight railroads, has already adopted some elements of precision scheduled railroading. But during the coronavirus pandemic, freight railways cut back so far that their service suffered when the economy rebounded in 2021. In December 2022, Mr. Shaw said Norfolk Southern would strengthen its network so that it could perform better through economic ups and downs. This meant keeping more capacity and workers on hand during lean periods.

Tony Hatch, a longtime railroad industry analyst, calls the company’s approach the “great experiment” and said he supported it. The rail industry cannot rely too heavily on controlling costs and should try to grow by winning new business and competing more effectively with trucking, he added.

Norfolk Southern’s financial results might have fared better under Mr. Shaw’s strategy, Mr. Hatch said, if the East Palestine derailment in February 2023 had not distracted management for a year. But he said Norfolk Southern’s management had struggled to fight back against Ancora. “Their messaging has not been good,” Mr. Hatch said.

One recent bright spot for Norfolk Southern has been its safety record. Its accident rate improved markedly last year while those of its peers worsened.

Precision scheduled railroading got a bad name when its pioneer, Hunter Harrison, tried to apply it at CSX in 2017. Customers complained that service deteriorated. Unions and rail workers have said the practices can undermine safety. The leaders proposed by Ancora said that CSX had made changes too fast and that they would introduce precision scheduled railroading practices at Norfolk Southern over a longer period — three years.

“When you put your network redesign on paper and bring that to your constituents, they can be partners in an implementation and help you do it right each step of the way,” Greg Marose, a spokesman for Ancora, said in a statement. “Make no mistake, this is a long-term strategy.”